Manager reaction: US-China trade war

28/03/2018

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May Ling Wee, China equities manager, discusses the implications for the Chinese economy on the recent announcements by the US and Chinese governments on the imposition of a range of import tariffs.

The Trump administration’s announcement of a 25% tariff on US$50 to $60bn of goods imported from China into the US followed an earlier announcement of tariffs on steel and aluminium imports. China’s response to the tariffs has so far been muted, restrained and practical. In response, the Chinese government has announced plans to impose tariffs on US$3bn of US imports (small relative to US GDP of US$19.7trn). These include a 15% tariff on fruits and nuts, wine and seamless steel pipe and a 25% tariff on hog/hog products and recyclable aluminium products and tariffs on soya beans. It is not in China’s interest to enter a full scale trade war, nor is it in the interest of the US. Therefore, we think it is likely that both parties will come to the negotiating table.
 
Over the weekend, China’s central bank incoming governor, Yi Gang, promised a further opening of China’s financial markets, a reiteration of President Xi’s statement following last October’s National Party Congress (NPC) of more open access to its financial markets. At October’s NPC, Chinese leaders also announced further opening and liberalisation in areas such as education and healthcare, a commitment to intellectual property protection, lower tariffs for some imported manufactured goods and an end to requirements for technology transfers in manufacturing.
 
Benefiting from opening up market access
China has been a large beneficiary of open market access since its entry into the World Trade Organization in 2001, which facilitated access to global markets and foreign direct investments. Multinationals in China hire a significant part of the labour force and China has benefited from their investments and the resultant productivity gains over the years. It is in China’s interest to keep this access to global markets and investments open.
 
Short-term impact may be minimal
What does this mean in terms of trade and its impact on gross domestic product (GDP)? Credit Suisse estimates suggest US$50 to $60bn accounts for between 2.2% to 2.6% of China’s goods exports and around 0.4% to 0.5% of China‘s US$14tn GDP. The actual impact may be less at an estimated 0.2% of GDP, after taking into account the import value of these exports. Therefore, the near-term impact to goods exports, GDP and total demand does not seem significant.
 
The longer-term implications could be larger as it means foreign and local firms must make considerations for tariffs in future, which is likely to change investment decisions where China has been a key part of the global supply chain. We think this only serves to accelerate China’s attempt to restructure its economy from low to high value exports, and from exports to domestic consumption.
 
Chinese economy more resilient now
We expect Chinese corporates to maintain higher value manufacturing onshore but shift offshore simpler, lower-value manufacturing processes to the rest of Asia. This is not a new phenomenon, but a process that has been in place for the last several years as Chinese wage levels have grown. Through the ‘One Belt One Road initiative (aiming to connect Asia, Europe, the Middle East and Africa with a vast logistics and transport network of roads, ports, railway tracks, pipelines, airports, and other infrastructure), China will also increase foreign direct investment to develop new export markets, trade and investment partners. For these reasons we believe the burgeoning domestic economy will be able to cushion China much better now compared to ten years ago.
 
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Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


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